Margin is the amount of money you are required to have in your account to make a specific trade. The best way to explain is by way of example:

Spread Better A has placed £2000 in a spread betting account and he wants to make his first trade. He wants to buy BP at 410p. He’s sure the stock is going to rise and decides he wants to place a £50 per point spread bet. He tries to place click the buy button of his market order but is refused the trade as he does not have enough funds in his account. The margin requirement for BP is 10%. Therefore the funds he is required to have in his account is:

£50 per point is equivalent to buying 5000 shares.

5000 shares would cost 410p(£4.1) * 5000 = £20,500.

10% of £20,500 = £2,050

He is therefore £50 short of the required margin to make this trade.

You can find out the margin requirement for each instrument from your spread betting firm.

You may have heard the term “Margin call” before. This is when your funds in your account fall below the required level to meet the margin required for the trades you have in place. This can happen if you don’t use a stop loss, you set your stop too far away from your open price or if slippage occurs on a non-guaranteed stop loss.

Here’s an example:

Spread better A has placed his trade on BP. He has £2000 in his account and is long on BP at £25 per point with a buy in price of 400p and no stop level set. The trade is open for a few weeks when disaster happens. BP shares fall 50p overnight and gap down opening at 350p. He is currently sitting on a 50point loss which is £25 * 50 = £1,250. He thinks, It’s bound to recover and keeps the trade open sure of a recovery in price. The bad news doesn’t stop coming and the price falls a further 50p during the day. At the close of the day BP is trading at 300p per share. He is currently facing a 100 point loss or £25 * 100 = £2,500. His account balance was only £2,000. He receives a margin call from his spread betting firm asking to place more funds into the account to cover the £500 difference.

The above example is only hypothetical but It can and does happen believe me. The above example uses no stop loss but if a stop loss is place any more than 80 points away (£2,000/£25 per point = 80) then the spread better runs the risk of receiving a margin call if the stock price falls too low.

I personally always trade with a stop loss in place. If you trade based on a strategy(which you should do) then your strategy should indicate where to place your stop loss. Once you have your stop position calculated then you can calculate your position size.